As parents, we want our children to be taken care of after we die. This is even truer when there are children with special needs because of their increased financial and long-term care needs.  Therefore, proper planning is necessary to benefit a child with a disability, including an adult child, and any siblings who may be left with the caretaking responsibility. In this month’s newsletter, we discuss a few ways to create an estate plan that benefits a child with special needs.

Special Needs Trusts

The best and most comprehensive option to protect a child with special needs is to set up a special needs trust (also called a supplemental needs trust). These trusts allow beneficiaries to receive inheritances, gifts, lawsuit settlements, or other funds and yet not lose their eligibility for certain government programs, such as Medicaid and Supplemental Security Income (SSI). These trusts are drafted so that the funds will not be considered to belong to the beneficiaries in determining their eligibility for public benefits.

There are three main types of special needs trusts:

  • First Party Special Needs Trust
    A first-party special needs trust is designed to hold a beneficiary’s own assets. While the beneficiary is living, the funds in the trust are used for their benefit, and when the beneficiary dies, any assets remaining in the trust are used to reimburse the government (also known as a “payback” provision) for the cost of medical care. This type of trust is especially useful for beneficiaries who are receiving Medicaid, SSI or other needs-based benefits and come into large amounts of money because this trust allows the beneficiaries to retain their benefits while still being able to use their own funds when necessary.
  • Third-Party Special Needs Trust
    The third-party special needs trust is most often used by parents and other family members to assist someone with special needs. This type of trust can hold any kind of asset imaginable belonging to the family member or other individual, including a house, stocks and bonds, and other types of investments. The third-party trust functions like a first-party special needs trust in that the assets held in the trust do not affect a beneficiary’s access to benefits and the funds can be used to pay for the beneficiary’s supplemental needs beyond those covered by government benefits. Unlike a first-party special needs trust, a third-party special needs trust does not contain the “payback” provision. This means that when the beneficiary with special needs dies, any funds remaining in the trust can pass to other family members or a charity, without having to be used to reimburse the government.
  • Pooled Trust
    A pooled trust is an alternative to the first-party special needs trust.  Essentially, a charity sets up this trust which allows beneficiaries to pool their resources with other trust beneficiaries for investment purposes, while still maintaining separate accounts for each beneficiary’s needs. When the beneficiary dies, the funds remaining in the account typically goes to the non-profit organization responsible for managing the trust.

Life Insurance

Not everyone has a large chunk of money that can be left to a special needs trust, so life insurance can be essential when creating an estate plan that benefits a special needs child. If you have established a special needs trust, a life insurance policy can pay directly into it, and it does not have to go through probate or be subject to estate tax. Be sure to review the beneficiary designation to make sure it names the trust, not the child. You should make sure you have enough insurance to pay for your child’s care long after you are gone. Without proper funding, the burden of care may fall on siblings or other family members. Using a life insurance policy will also guarantee future funding for the trust while keeping the parents’ estate intact for other family members.

ABLE Account

An Achieving a Better Life Experience (ABLE) account, allows individuals with disabilities who became disabled before they turned 26, to set aside up to $15,000 a year in tax-free savings accounts without affecting their eligibility for government benefits. This money can come from the individual with a disability or anyone else who may wish to give him money.

Get Help with Your Plan

However you decide to provide for a child with special needs, proper planning is essential. If you or someone you know are ready to create an estate plan that benefits a special needs child, please contact our office.  We would be happy to work with you.